Ch3 Introduce to Risk Management

• Meaning of Risk Management

• Objectives of Risk Management
• Steps in the Risk Management Process
• Benefits of Risk Management
• Personal Risk Management

Hwang Yawen
1. Meaning of Risk Management

✓ Risk management is a process that identifies loss exposures faced by an

organization and selects the most appropriate techniques for treating such
exposures (p.68, 風險管理是一個組織用來辨認其所面臨之損失曝險，並選擇最合適的方法來處
理此風險之過程)

✓ A loss exposure is any situation or circumstance in which a loss is possible,

regardless of whether a loss occurs (p.68, 損失曝險係指任何具有發生損失可能性之狀況或
條件，無論其是否實際發生)
• a plant that may be damaged by an earthquake
• an automobile that may be damaged in a collision

✓ Should consider both pure and speculative loss exposures (p.68, 應同時考量純粹風
險與投機風險)
2. Objectives of Risk Management

Pre-loss objectives (損失前之目標, p.69)

 Prepare for potential losses in the

most economical way (以最經濟的
方式來預備支應潛在之損失)

 Reduce anxiety (降低焦慮)

 Meet any legal obligations (符合任
何法律義務)
2. Objectives of Risk Management

Post-loss objectives (損失後之目標, p.69)

 Survival of the firm (公司能存活下來)

 Continue operating (能繼續營運)
 Stability of earnings (維持穩定的盈餘)
 Continued growth of the firm (公司能持續成長)
 Social responsibility (社會責任)
3. Steps in The Risk Management Process

Exhibit 3.1 Steps in the Risk Management Process (p.70)

3. Steps in The Risk Management Process

1 Identify loss exposures (辨認損失曝險, p.69-70)

Must identify all major and minor loss exposure

 Property loss exposures (財產損失曝險)
 Liability loss exposures (責任損失曝險)
 Business income loss exposures (營業收入損失曝險)
 Human resources loss exposures (人力資源損失曝險)
 Crime loss exposures (犯罪損失曝險)
 Employee benefit loss exposures (員工福利損失曝險)
 Foreign loss exposures (國外損失曝險)
 Intangible property loss exposures (無形資產損失曝險)
 Failure to comply with government laws and regulations (未遵守政府法律與規範)
3. Steps in The Risk Management Process

1 Identify loss exposures (辨認損失曝險)

The sources of information to identify the preceding loss exposures: (p.70)

 Risk analysis questionnaires and checklists (風險分析問卷和清單)
 Physical inspection (實地調查)
 Flowcharts (流程圖)
 Financial statements (財務報表)
 Historical loss data (損失之歷史資料)

Risk managers must keep abreast of industry trends and market changes that can create new loss
exposure and cause concern (風險管理者必須及時瞭解行業趨勢以及市場變化，這些變化可能會衍生
新的損失曝險並引發關注)
3. Steps in The Risk Management Process

2 Measure and analyze the loss exposures (損失曝險之衡量與分析, p.70-71)

Estimate for each type of loss exposure

✓ Loss frequency refers to the probable number
of losses that may occur during some time
period (損失頻率係指在某段時間內損失之可能發生次數，
通常用機率表示, p.70)

✓ Loss severity refers to the probable size of the

losses that may occur (損失幅度係指可能發生損失之
金額大小, p.70)

EX: There are 300,000 houses in the town. Last year, 540
times of outbreak of fires occurred, and the total losses were
64.8 million dollars. Please calculate the loss frequency, loss
severity and expected loss.
3. Steps in The Risk Management Process

2 Measure and Analyze Loss Exposures

Notice that
 Ranking exposures by importance (按重要程度將損失曝險進行排序, p.71)
 Loss severity is more important than loss frequency (損失幅度較損失頻率重要, p.71)
 The maximum possible loss (MPL) is the worst loss that could happen to the firm during
its lifetime (最大可能損失係指一間公司在其生命週期中可能發生的最大損失, p.71)
 The probable maximum loss (PML) is the worst loss that is likely to happen (可能最大損失係
指最有可能發生的最大損失, p.71)

 Catastrophic losses are difficult to predict, but are important (巨災損失難以預測，但非常重要,

p.71)
3. Steps in The Risk Management Process

2 Measure and Analyze Loss Exposures

maximum possible loss (MPL) & probable maximum loss (PML) (課本例子, p.71)
擔心開車出門撞到別台車的修車賠償損失？

Reference: http://wewe333we.pixnet.net/blog/post/188356338-
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3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
(選擇適當的技術組合來處理損失風險, p.71-78)

Risk control refers to techniques that reduce the frequency and severity of losses
(風險控制是指能降低損失頻率和損失幅度的方法, p.71)
(指透過降低損失頻率與損失幅度而減少預期損失的行為，以及降低實際結果變異程度的作為，許文彥)

1) Avoidance (避免) means a certain loss exposure is

never acquired or undertaken, or an existing loss
exposure is abandoned (p.71)
✓ Examples in the textbook (p.72)
✓ The chance of loss (損失機會) is reduced to zero
✓ Two disadvantages
 The firm may not be able to avoid all losses
 It may not be feasible or practical to avoid the
exposure
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk control refers to techniques that reduce the frequency and severity of losses

2) Loss prevention (損失預防) refers to measures that reduce the frequency of a particular
loss (降低損失頻率之風險管理方法即稱為損失預防, p.72)
Examples in the textbook
Loss prevention to zero probability → avoidance → No
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk control refers to techniques that reduce the frequency and severity of losses
3) Loss reduction (損失抑制) refers to measures that reduce the severity of a loss after it
occurs (能降低損失幅度之方法即為損失抑制, p.72)
Examples in the textbook

Post-loss reduction measure

Pre-loss reduction measure

3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk control refers to techniques that reduce the frequency and severity of losses

4) Duplication (複製) refers to having
backups or copies of important
documents or property
available in case a loss occurs
(p.72)
5) Separation (分隔) means dividing the assets
exposed to loss to minimize the harm from
a single event (p.72)
(example)

6) Diversification (分散) means spreading the

loss exposure across different parties,
securities, or transactions, to reduce the
chance of loss (p.72)
(example)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
(風險融資係指在損失發生後提供支付損失的方法, p.72)
(如何在損失前適當安排，以在損失發生後取得資金用以支應損失，或降低因為損失帶來的現金流量波動, 許文彥)

依承擔風險的主體是否改變分為二類：自留(Retention)以及風險移轉(Risk Transfer)

Retention (自留) 購買保險vs非保險的風險移轉

✓ Retention means that the firm retains part or all of the losses that can result
from a given loss (指企業或個人針對某風險保留支付部分或全部損失, p.73)
1) Active retention (主動自留/計畫性自留)
其他風險管理工具的成本太高/本身有能力承擔可能發生的損失
2) Passive retention (被動自留/非計劃性自留)
無法移轉的風險/未察覺到或因故未能及時移轉的風險
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Retention
✓ Retention is effectively used when (p.73)
1) No other method of treatment is available (沒有其他風險管理方法)
2) The worst possible loss is not serious (最大之可能損失並不嚴重)
3) Losses are highly predictable (損失容易預測)
➢ Determining retention levels (第一步：決定自留水準, p.73)
• The retention level is the maximum uninsured loss it can absorb without adversely
affecting the company’s annual earning (自留水準應是可以吸收之最大損失(未保險的部分)，
且不會對公司之年度盈餘產生不利影響)
• Two ways: determine the maximum retention as a percentage of
 the company’s annual earning (before taxes) (公司稅前之年度盈餘)
 the firm’s net working capital (公司淨營運資本)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Retention

➢ Paying retained losses (第二步：支付自留損失, p.73)

1) Current net income (當時之淨收入)
自行提撥準備金(Reserving)
2) Unfunded reserve (未指定用途的準備金項目)
3) Funded reserve (提撥準備金) 自己保險(Self-Insurance)
4) Credit line (信用貸款) 專屬保險(Captive insurer)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Retention
Reasons for forming a captive include (p.74)
Captive insurer (專屬保險公司, p.73-74) 1) The parent firm may have difficulty
An insurer owned by a parent firm for the obtaining insurance
purpose of insuring the parent firm’s loss 2) To take advantage of a favorable regulatory
exposures (大規模的企業(非保險公司)為節省保險 environment
費或規避租稅，而投資設立一保險公司，專營母公 3) Costs may be lower than purchasing
司及其關係企業的保險業務) commercial insurance
• A single-parent captive is owned by only one 4) A captive insurer has easier access to a
parent reinsurer
• An association or group captive is an insurer
5) A captive insurer can become a source of
owned by several parents
profit (略)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Retention

Captive insurer
• 優點 • 缺點
1) 節省保險成本 1) 業務能量有限，大數法則的運
2) 規避租稅負擔 用受限制
3) 增加承保彈性 2) 財務基礎較為薄弱
4) 促使業者加強本身的損失防 3) 保險公司經營的限制，如最低
阻工作 資本額，資金運用的條件等
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Retention ✓自己保險 (許文彥)
• 當公司有足夠數量的危險單位，使公司可以估
✓ Self-insurance (self-funding, p.75) 計可能發生的損失，而且每個危險單位的損失
• A special form of planned retention 不大時，則公司可以有計劃的提撥基金，以用
by which part or all of a given loss 來支付損失
exposure is retained by the firm
• 危險單位需符合大數法則的多數、同質且分散
• Widely used in workers
compensation • 原則上為專款專用
• 自己保險的基金建立費時，若在基金累積尚不
足以彌補損失時即發生損失事故，則將影響其
自行提撥準備金(Reserving)與
財務的安全性
自己保險(Self-Insurance)的差異
• 通常在初期可以搭配其他風險融資的工具，如
購買保險，以降低現金流量的波動度
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur

Retention
Advantages (p.76) Disadvantages (p.76)
1) Save on loss costs 1) Possible higher losses
2) Save on expenses 2) Possible higher expenses
3) Encourage loss prevention 3) Possible higher taxes
4) Increase cash flow
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Non-insurance Transfers (非保險的風險移轉, p.76)
A method other than insurance by which a pure risk and its potential financial consequences
are transferred to another party
EX: contracts, leases, hold-harmless agreements,… (契約、租約、免責條款…)

營建合約 免責條款
承包商必須完全負責營
建期間內建築工人或第
三人因意外事故所造成
之損失賠償或法律責任
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Non-insurance Transfers (非保險的風險移轉, p.76)

Advantages (p.76) Disadvantages (p.76)

1) transfer some losses that are not
insurable
2) less expensive
3) transfer loss to someone who is in a
better position to control losses
1) contract language may be ambiguous, so
transfer may fail
2) if the other party fails to pay, firm is still
responsible for the loss
3) insurers may not give credit for transfers
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Commercial Insurance (商業保險, p.76-78)
Insurance is appropriate for low-probability, high-severity loss exposures

1) Selection of insurance coverages (選擇保險涵蓋範圍)

2) Selection of an insurer (選擇保險公司)
3) Negotiation of terms (協議保單條款)
4) Dissemination of information concerning insurance coverages (在公司傳
遞保險範圍之相關訊息)
5) Periodic review of the insurance program (定期檢視保險計畫)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Commercial Insurance
First, select the insurance coverages needs (選擇所需之保險涵蓋範圍, p.77)
✓ Combining commercial insurance and retention (結合商業保險與自留兩種方法)
✓ Two ways:
1) Deductible (自負額): a specified amount subtracted from the loss payment
otherwise payable to the insured
2) Excess insurance (超額保險): the insurer pays only if the actual loss exceeds
the amount a firm has decided to retain
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Commercial Insurance
Second, the risk manager selects the insurer (or insurers), to provide the coverages (p.77)
1) The financial strength of the insurer (保險公司的財務狀況)
• Ex: the size of the insurers’ surplus, underwriting and investment results, adequacy of
reserves for outstanding liabilities, types of insurance written, the quality of management
• Rating Agencies
2) Risk management services provided by the insurer (保險公司提供之風險管理服務)
• Providing information concerning the risk management services
• EX: risk control services, assistance in identifying loss exposures,…
3) The cost and terms of protection (保障之成本與條款)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Commercial Insurance
Third, the terms of the insurance contract must be negotiated (p.77)
• Printed policies (endorsements and forms) (制式化保單/附加條款/批單或批註) or
Specially tailored manuscript policy (客製化保單)
• The parties must agree on the contract provisions, endorsements, forms, and
premiums

Fourth, information concerning insurance coverages must be disseminated to others

in the firm (p.77)
Finally, the risk manager must periodically review the insurance program (p.78)
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Risk financing refers to techniques that provide for the payment of losses after they occur
Commercial Insurance

Advantages (p.78) Disadvantages (p.78)

1) Firm is indemnified for losses; can 1) Premiums may be costly
continue to operate 2) Negotiation of contracts takes time and
2) Uncertainty is reduced effort
3) Firm may receive valuable risk 3) The risk manager may become lax in
management services exercising loss control
4) Premiums are income-tax deductible
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Which technique should be used? (應使用哪種風險管理工具, p.78-79)
Exhibit 3.2 Risk Management Matrix
3. Steps in The Risk Management Process

3 Select the appropriate combination of techniques for treating the loss exposures
Market Conditions and the Selection of Risk Management Techniques
✓ Risk managers may have to modify their choice of
techniques depending on market conditions in the
insurance markets (風險管理人員可能需要依據保險市場的市
場條件來調整風險管理方法之選擇)
✓ The insurance market experiences an underwriting
cycle (保險市場會經歷核保週期)
1) In a “soft” market, profitability is improving,
standards are loosened, premiums decline, and
insurance become easier to obtain
2) In a “hard” market, profitability is declining,
underwriting standards are tightened, premiums
increase, and insurance is hard to obtain
3. Steps in The Risk Management Process

4 Implement and monitor the risk management program (施行並監督風險管理計畫, p.79-80)

✓ Risk management policy statement (風險策略說明書)
1) Outlines the firm’s objectives and policies
2) Educates top-level executives
3) Gives the risk manager greater authority
4) Provides standards for judging the risk manager’s performance
✓ Risk management manual (風險管理手冊)
1) Describe the detail of the risk management program
2) Train new employees
✓ A successful risk management program requires active cooperation from other departments
in the firm (Accounting, Finance, Marketing, Operations, Human resources,….)
✓ The risk management program should be periodically reviewed and evaluated to
determine whether the objectives are being attained or if corrective actions are needed (p.80)
4. Benefits of Risk Management
(p.80)

 Enables firm to attain its pre-loss and post-loss objectives more easily (使公司更
易達成其損失前和損失後的目標)
 Reduces a firm’s cost of risk (降低公司之風險成本)

 Reduction in pure loss exposures allows a firm to enact an enterprise risk

management program to treat both pure and speculative loss exposures (降低純粹
風險之損失後，將使公司能制定企業風險管理計劃，以管理純粹風險和投機風險)
 Society benefits because both direct and indirect losses are reduced (整體社會獲利，
因同時降低直接與間接損失)
5. Personal Risk Management

(p.81-82)

✓ Personal risk management refers to the identification and analysis of pure risks faced
by an individual or family, and to the selection of the most appropriate technique(s)
for treating such risks
✓ The same principles applied to corporate risk management apply to personal risk
management
1) Identify potential losses
2) Measure and analyze loss exposures
3) Select the appropriate combination of techniques for treating the loss exposures
➢ avoidance, risk control, retention, noninsurance transfers, insurance
4) Implement and monitor the risk management program